(
December 29, 1999
) --
Call the doctor -- Social Security is sick, enfeebled, and ready for the nursing home.

Who says? The secretary of the Treasury, the secretary of Labor, the secretary of Health and Human Services, and the commissioner of Social Security, that's who.

These big wigs -- along with two appointees -- are the trustees of the Social Security trust funds. They are not bystanders; they are the people minding the store, directing the traffic, captaining the USS Social Security -- the biggest ship in the federal budget's fleet.

Of course, they didn't use such words as "enfeebled." What they did say, in their 1999 annual report, is that the Social Security system will begin running at a deficit by 2014, i.e., spending more on benefits than it takes in through taxes. By 2034, any reserves will be depleted.

These projections only deal with the retirement side of Social Security. The Medicare program, which pays medical costs for those over 65 who qualify for Social Security, is in even worse shape: The Hospital Insurance Trust Fund, which is the reserve fund for Medicare, is projected to be gone by 2015.

Here's something else to set your future dentures a-chatterin': The Social Security Advisory Board -- an independent bipartisan panel created by Congress and the president -- has issued a report saying that the trustees are underestimating the problem. The panel claims that people will live two to four years longer (the gall!) than the Trustees predict. The longer people live, the more Social Security will have to pay. The panel estimates that the Social Security shortfall is 25% worse than the trustees project.

To understand the problem, you have to understand how Social Security works. When the government takes 7.65% out of your paycheck (6.2% for Social Security and 1.45% for Medicare -- your employer also contributes an equal amount on your behalf), that money is not put aside in a special account that waits around for you to retire. This tax, known as FICA (Federal Insurance Contributions Act), goes to pay benefits for today's retirees.

For years now, the Social Security inflow has been greater than the outflow, so trust funds were established to invest the money for future use. The money in the funds is lent to the government in exchange for specially issued government bonds. This results in two major problems: 1) The return on those funds is very small, and 2) there is no actual money in the trust funds; they may as well be slips of paper that say, "IOU. Hugs and kisses, the Feds."

Social Security's illness will be exacerbated by the 76 million baby boomers that will start retiring around 2008. When Social Security began in 1940, there were 16 workers supporting each beneficiary. Today, there are three workers for each beneficiary. By 2030, there will be only two, and America's elderly population will be twice as large as it is today.

These years may sound far off, but trouble begins much earlier. By 2014, the trustees predict that Social Security benefits will exceed tax revenues, and interest from the trust funds will have to cover the shortfall. (This is already happening with the Medicare trust fund.) By 2022, interest income will be insufficient, and the program will have to dip into the principal. The trusts will have to redeem bonds, which the government will have to buy back.

Here's where things get rough: The government doesn't have that money. When the trust funds purchased the bonds, the government used that money it received for all kinds of purposes, from building roads to providing foreign aid. So where will the government get that money? Higher taxes, combined with reduced Social Security benefits. In other words, the workers of tomorrow will have to pay higher federal and Social Security taxes to receive less in benefits, if they receive them at all (some proposed changes to Social Security involve denying benefits to those with a certain amount of life savings).

Another problem: Today, Social Security is the major source of income for two-thirds of Americans 65 and older, and the only source of income for the poorest 30 percent. What will happen to these people when benefits are reduced in the not-too-distant future?

Let's digress from demographics and trust funds and consider the fundamental assumptions of Social Security. Perhaps the program's illness is congenital. After all, are we not Fools? Do we not stand for taking control of one's finances and rage against the abdication of our financial well being?

Ever wonder how much better off you'd be if you could invest all the money that you, and your employer on your behalf, contribute to Social Security?

Wonder no longer. The Cato Institute, a proponent of privatizing Social Security, has developed a calculator to compare Social Security benefits with what could be available if the taxes were invested in bonds, stocks, or a mix.

Using the calculator, let's see what the results would be for a 22-year-old entering the workforce today at a $25,000 annual salary. (The calculator assumes 3% inflation, 5% salary scale, a 6% return on bonds, a 10% return on stocks, and a retirement age of 67. The assumptions can be adjusted.)

Even the conservative bond fund beats Social Security, and the other two funds absolutely spank it.

As the Cato Institute explains, "Even if Social Security's financial difficulties can be fixed, the system remains a bad deal for most Americans, a situation that is growing worse for today's young workers. Payroll taxes are already so high that even if today's young workers receive the promised benefits, such benefits will amount to a low, below-market return on those taxes. While today's retirees will generally receive back all they paid into Social Security, plus a modest return on their investment, when today's young workers retire, they will actually receive a negative rate of return -- less than they paid in. A young worker today would actually be better off stuffing his Social Security taxes in a mattress than counting on benefits from the program."

You can argue predictions, you can debate life expectancies, but you can't deny the impending retirement boom and gloom. Not even Dale Carnegie could save this Social Insecurity.